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VAT in Cyprus: Value Added Tax on Immovable Property

On the 13th of November 2017 Law 157(Ι)/2017 was published in the official Gazette of the Republic, by which the Law on Value Added Tax (VAT) in Cyprus is significantly amended with regards to transactions on immovable property.

These amendments were necessary for the purpose of aligning Cyprus VAT law with the European Directive 2006/112/EC on the common system on value added tax. Upon joining the European Union, the Republic of Cyprus had exercised its right to derogate from the obligation to enforce the Directive’s provisions regarding to the imposition of VAT on transactions on building land. The right of derogation was valid until the 31st of December 2007, and the amendments were only set in place after a ten-year delay, in 2017.

According to the provisions of the Law on VAT, as amended, now VAT is imposed at the rate of 19% on the value of the transaction related to immovable property in the following transactions:

1.  Rental of immovable property to a lessor who is a person subject to tax, for the purpose of carrying out business activities by the person.

2.  Rental of a building or a part thereof with an option to purchase, when the rental takes place before the building’s first use.

3. Transfer of a building or a part thereof and of the land on which it is situated or a transfer of an undivided share thereof, when the transfer takes place before the building’s first use, unless an application for a planning permit has been duly filed with regards to the property, prior to the 1st of May 2004, or where such permit is not required by virtue of a government decree.

4. Transfer of the posession of a building or a part thereof and of the land on which it is situated or a transfer of an undivided share thereof, by virtue of a contract of sale or by virtue of a contract of sale according to which the buildings are to be transferred along with the land at some point in the future, or by virtue of a lease thereof, with an option to purchase provided that it takes place before the building’s first use, unless an application for a planning permit has been duly filed with regards to the property, prior to the 1st of May 2004, or where such permit is not required by virtue of a government decree an application for a building has been duly filed with regards to the property, after the 1st of May 2004.

5. Transfer of posession, or transfer of an undivided share, or transfer by virtue of a contract of sale or by virtue of a contract of sale according to which the transfer will take place at some point in the future, or by virtue of a lease with an option to purchase regarding undeveloped building land, which is deemed for the construction of one or more immovable constructions as part of business activity unless the transfer or the filing of the contract of sale to the Land Registry took place before the date in which Law 157(Ι)2017 came into force.

6. Accommodation in the context of the hotel industry.

7. Rental of premises or spaces for the purpose of vehicle parking.

It is noted that VAT is not imposed on transactions regarding the rental of residential property that is used as such.

For the purposes of imposing VAT, first use means the first time a building is used in any way after being constructed, including use or residence by the initial owner himself, a lease or any other type of use.

Furthermore, the Council of Ministers of Cyprus has issued Regulations on VAT in Cyprus in order to define among others, the term “undeveloped building land” for the purposes of the amended Law. The Regulations were published in the official Gazette of the Republic on the 22nd of December 2017.

According to the Regulations, for the purposes of imposing VAT, “licensed construction” is a construction for which a planning and/or building permit is required for it to be considered licensed.

Also, according to the Regulations, for the purposes of imposing VAT on transactions that fall under paragraph 5 above, the term “undeveloped building land” covers the following types of plots of land:

  • all undeveloped plots which are deemed to be used for the construction of buildings and which are whole building plots or plots under the process of being made into building plots, or plots for which a certificate of final approval or a building plot title deed has been issued.
  • plots which resemble building plots due to one of the following: due to position, or due to proximity to buildings, or due to the fact that they fall within a planning zone of the following types: residential, commercial, tourist, industrial, special type or mixed type development.
  • plots outside of development areas for which a planning or construction permit was issued, with regards to one of the following types of developments: large, unified, specialist, special type, recreational or entertainment developments, regardless of whether the license was issued in the course of normal process or by exemption.
  • new plots that may be created by sea bedding, for which a planning or building permit has been issued.

Regarding the above types of plots, the regulations’ criteria, cover the following types of status as to existing buildings in the plot:

  • Plots in which there is no existing development, regardless of whether a planning or building permit has been issued and regardless of whether an application for either such permit has been filed and is pending approval.
  • Plots in which there is no existing development, but in which antiquities exist, under the provisions of the Antiquities Law.
  • Plots in which a legal or illegal development exists, which is deemed to be demolished by virtue of a relevant license.
  • Plots in which a small portion of unfinished unusable licensed development exists, i.e. a development that is not actively under construction.
  • Plots in which a small portion of unfinished usable licensed development exists or a reserved structure exists, which does not exceed 10% of the plot’s maximum limit of buildable area.

Also, according to the Regulations, for the purposes of imposing VAT on transactions that fall under paragraph 5 above, the term “undeveloped building land” does not cover the following types of plots of land:

  • Plots in livestock raising zones.
  • Plots in agricultural zones.
  • Plots in archaeological site areas.
  • Plots in environmentally protected areas.

This article is given for information purposes only and it does not constitute legal advice.

By George Antoniades

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PUBLICATIONS 

Taxation of Companies in Cyprus

C yprus tax resident companies are taxed on their worldwide income. A company is tax resident in Cyprus if it is managed and controlled in Cyprus. The corporation tax for companies in Cyprus is 12.5% however foreign taxes paid can be credited against this corporation tax.

Dividends:
o There is no withholding tax on dividends paid to non-residents whether companies or individuals.
o Dividends received by a resident or non-resident company, are generally exempt from corporation tax and Special Contribution for Defence (SCD).
o Dividends received by a Cyprus resident company from a Cyprus resident company are exempt from Special Contribution for Defence. (This is unless dividends are paid out of profits which are more than 4 years old.)
o Dividends received by a Cyprus resident company from a Cyprus non-resident company are generally exempt from Special Contribution for Defence.

Interest:
o Interest paid to non-resident companies is not subject to any tax.
o Interest paid to a resident company is subject to a Special Contribution for Defence tax at a rate of 30% (withheld at source) unless the interest is earned in connection with ordinary business activities.

Royalties:
o Royalties paid to non residents are exempt from withholding tax unless the rights giving rise to the royalty are used in Cyprus in which case they are subject to withholding tax of 5% on film royalties and 10% on other royalties.

Capital Gains:
o Gains arising from the sale of shares are tax-exempt, unless the gain results from the sale of shares in an unlisted company which owns immovable property situated in Cyprus.

Capital gains tax is levied at a rate of 20% on the gains from the disposal of immovable property or shares in unlisted companies owning property in Cyprus.

Losses:
o Tax losses may be carried forward for five years for set off against future taxable profits.

Tax Credit:
o Unilateral credit relief applies for tax paid abroad; but where a tax treaty exists,
the treaty provisions apply if more beneficial.

 

 

Rent:
o Rent paid to a Cyprus tax resident, is subject to Special Contribution for defence at a rate of 3% on 75% of the rental income. Note that Rental income is subject to personal income tax and corporation tax.  Transfer fees on immovable property:
o Transfer fee ranging from 3% to 8% calculated on the market value of the property as estimated by the Land Registry.

Annual Company levy of €350

Other taxes:
o Capital duty at 0.6% on the authorised share capital.
o Payroll tax.
o Annual real property tax on 1980 values increasing from 0.6% to 1.9%.
o Social Security.
o Stamp duty on contract relating to property or actions performed in Cyprus. (Maximum payable is €20,000)

This article is written for information purposes only and does not constitute legal advice.

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PUBLICATIONS 

Taxation of Individuals in Cyprus

Cyprus tax resident individuals are liable to income tax on their worldwide income.
Residence requires presence in Cyprus of more than 183 days per calendar year. Cyprus non-tax residents are liable to income tax for income arising from sources in Cyprus. The first €19,500 is tax free and above this amount the income tax rates are progressive ranging from 20% to a maximum of 35% for chargeable income above €60,000.

Dividends:
o Dividends paid to a resident individual are subject to a Special Contribution for Defence (SCD) at a rate of 17% (20% in 2013) which is withheld at source.
o Dividends paid to a non-resident individual are not liable to SCD

Interest:
o Interest paid to a non-resident individual is not subject to any tax.
o Interest paid to a resident individual is subject to SCD at a rate of 30% which is withheld at source.

Rent:
o Rent paid to a Cyprus tax resident, is subject to SCD at a rate of 3% on 75% of the rental income. Note that Rental income is also subject to personal income tax.

Transfer fees on immovable property:
o Transfer fees ranging from 3% to 8% calculated on the market value of the property as estimated by the Land Registry.

Other taxes:
o Annual real property tax on 1980 values increasing from 0.6% to 1.9%.
o Social Security.
o Stamp duty on contract relating to property or actions performed in Cyprus. (Maximum payable is €20,000)

This article is written for information purposes only and does not constitute legal advice.

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